howard s. krooks, esq., cela, cap 7284 west palmetto park road suite 101 boca raton, fl 33433 1-800...

Howard S. Krooks, Esq., CELA, CAP 7284 West Palmetto Park Road Suite 101 Boca Raton, FL 33433 1-800 ELDERLAW 561-750-3850 www.ElderLawAssociates.com Boca Raton Aventura Weston West Palm Beach Of Counsel, Amoruso & Amoruso LLP, Westchester, NY PAELA: Complex Drafting in Elder Law

What We Will Cover Irrevocable Trust Drafting Provisions Drafting Irrevocable Trusts for VA v. Medicaid Purposes Decanting How to Safely Achieve Grantor Trust Status Trust Protector Provisions 3 rd Party SNT From Revocable to Irrevocable Power of Attorney Agent Designator Provisions

Irrevocable Trusts - Pros Protect Homes (and highly appreciated assets) from Being considered an available resource Estate recovery (depends on expanded def. of estate) House can be sold during lifetime and proceeds held in the trust w/o impacting Medicaid Beneficiaries receive step-up in basis, rather than carryover basis Grantor can retain right to receive income Income can be taxed to the grantor (and not children) Funds can be used for grantors benefit through distributions to lifetime principal beneficiaries

Irrevocable Trusts - Cons 5 Year Lookback Applies Clearly an advance planning tool Its Irrevocable (ummmcannot be revoked) Does Trust Code permit revocation with consent of grantors, trustees and beneficiaries? No Principal to Grantor

Irrevocable Discretionary Trust is Available Resource Gsellman v. Ohio Dept. of Job and Family Services Department of Human Services (Ohio Appeals Court) Trust created in 1999 Medicaid applied for in 2007 Trustee had sole discretion to distribute trust assets and refused to do so If there are ANY circumstances.

Irrevocable Trust with Right to Borrow is Available Resource Edholm v. Minnesota Dept. Human Services (2013 WL 2926468 June 17, 2013) Irrevocable trust created September 16, 2004 5 children named lifetime beneficiaries Grantor reserved right to borrow from income/principal w/o security Grantor trust provision $124,000 in trust (really?) 2011 Medicaid Application filed Assets in trust deemed available resources due to grantor loan provision

Irrevocable Trust with Right to Borrow is Available Resource Court noted Federal law provides - If there are ANY circumstances under which payment from the trust could be made to or for the benefit of the individual [applying for Medicaid]. 42 USC 1396p(d)(3)(B)(1) Grantor argued any loan would need to be repaid Court focused on above language in federal statute

Irrevocable Trust with Trustee Discretion to Pay to or for Benefit of Beneficiary is Not an Available Resource OLeary v. Thorn (Civil Docket WOCV2013-01929A September 18, 2014) Grantor retained income interest Trust principal considered to be in control of Grantor Ambiguous Provision The Trustee may apply any or all of the income or principal of any share or portion of the Trust to or for the benefit of any beneficiary and through such agencies as the Trustee deems advisable instead of paying it directly to the beneficiary or his or her guardian. Settlors intent determinative per court Article 2 stated principal could not be distributed to grantor under any circumstances

Statement of Intent

Include (Argument For) Provides evidence of intent in case ambiguity Dont Include (Argument Against) VA Denials Be careful of language Dont provide trust Decant

An Important Restriction Electing Unitrust Status If grantor is receiving income, always prohibit the trustee from electing unitrust status Even if no income is being paid to the grantor, it is a good idea to restrict Unitrust option

Unitrust Status By choosing to restrict trustee option to elect unitrust status, the following language comes into the trust:

Another Important Restriction Adjusting Principal and Income Require Trustee to Follow States Principal and Income Act (80 P.S. 8104) We dont want the trustee to mix principal with income if the grantor has an income right Medicaid Interpretation Gives the grantor access to principal

Lending Power Allows trustee to make loans to any other person or beneficiary (excluding grantor) Be careful not to extend loan provision to grantor to avoid Medicaid arguing that trust principal is available to the grantor

Loans to Trustee No Medicaid implications Unless grantor is also trustee Constitutes self dealing In general not permitted unless authorized by the trust and/or consented to by the beneficiaries after full disclosure. A few states do not permit it at all, even with full disclosure and consent.

Power to Decant Important power for the trustee to hold Can help get assets out of a trust that no longer works or was drafted improperly See language in handouts Pennsylvania does not have a decanting statute Absent case law to the contrary, would still add decanting option

Decanting to 3 rd Party SNT Allowed In the Matter of Schreiber (2013 N.Y. Misc. LEXIS 4353; 2013 NY Slip Op 23333 Nassau County Surrogates Court September 30, 2013) EPTL 10-6.6(j)(1) Trustees attempt to decant into 3 rd party SNT opposed by New York AG Original Trust Dated December 17, 1992 Daniel was 19 months and not disabled May 7, 2012 Daniel turns 21/disabled Trust ($400k principal) provides Right to withdraw principal at age 21 Staggered Distributions 25, 30 and 35

Decanting to 3 rd Party SNT Allowed In the Matter of Schreiber (2013 N.Y. Misc. LEXIS 4353; 2013 NY Slip Op 23333 Nassau County Surrogates Court September 30, 2013) Major Issue Was trust effectively decanted prior to Age 21? AG argued it should be 1 st party trust Statute requires 30 days after notice of decanting Notice of Exercise dated May 1, 2012 May 31 Effective Date Consent signed by Daniels father dated May 2 Daniels birthday May 7

Decanting to 3 rd Party SNT Allowed In the Matter of Schreiber (2013 N.Y. Misc. LEXIS 4353; 2013 NY Slip Op 23333 Nassau County Surrogates Court September 30, 2013) Critical Trust Provision Section 8 - Parent could consent to the decanting on Daniels behalf Otherwise only guardian or POA Fathers May 2nd Consent deemed valid Court Held that 3 rd party rather than 1 st party SNT was created No payback required

Grantor Trust Status Trying to achieve certain tax advantages over Income Principal Or Both Principal and Income Treasury Regulations Section 1.671-2(e)(1) "[A] grantor includes any person to the extent such person either creates a trust, or directly or indirectly makes a gratuitous transfer (within the meaning of paragraph (e)(2) of this section) of property to a trust."

Grantor Trust Status We want grantor trust status over income and principal for several reasons Desirable for income generated by trust assets to be taxed at the grantors individual tax rates rather than higher/more compressed trust tax rates We want capital gains taxed at the individuals lower rates We want to preserve the IRC 121 exclusion on capital gain if the home is sold We want to maintain property tax exemptions

Grantor Trust Status There are a number of grantor trust rules in IRC 671-679 We only have to be concerned with 2, as they provide us with the tax benefits we are looking for

Grantor Trust Status Power to Add Charitable Beneficiaries IRC 674(b)(5), Power to Distribute Corpus May be held by Grantor, Trust Protector or other Non-Adverse Individual Power to Substitute Assets of Equivalent Value IRC 675(4)(C), General Powers of Administration May be held by the Trust Protector or Non- Adverse Individual

A Word of Caution Pennsylvania members report the possibility of adding charitable beneficiaries could trigger a 2% transfer tax see warning below:

Grantor Trust Status Just retaining an income right is not enough to achieve our goals If a grantor has only an income interest in the trust, then only those items relating to trust income will be taxable to the grantor If the grantor has only an interest in the principal, then the grantor may only recognize income, deductions and credits that are attributable to trust principal

Grantor Trust Status Combining a Limited Testamentary Power of Appointment with either the power to substitute assets of equivalent value, or the power to add charitable beneficiaries Results in grantor trust status over both income and principal

Veterans Asset Protection Trust (VAPT) Avoid grantor trust status So income is not reported on veterans tax return, preventing the VA from including phantom income during continuing qualification reviews It only takes one trust provision to create grantor trust status, but it takes all of them to avoid it

Veterans Asset Protection Trust (VAPT) Grantor Trust Rules IRC 671679 Regs. 1.671-1 to 1.679-7

Veterans Asset Protection Trust (VAPT) Grantor Trust Rules 673; Reversionary Interests 673(a): A reversionary interest in corpus or income that exceeds 5% of trust value at inception 673(c): For purposes of 673(a), maximum exercise of discretion in favor of grantor is assumed

Veterans Asset Protection Trust (VAPT) Grantor Trust Rules 674; Power to control beneficial enjoyment 674(a): A power of disposition of corpus or income exercisable by grantor or nonadverse party 672(a): Defines adverse party as one who has a substantial beneficial interest that would be adversely affected by the exercise or nonexercise of the power

Veterans Asset Protection Trust (VAPT) Grantor Trust Rules 674; Power to control beneficial enjoyment 674(c): Exception for corpus and income distributions by a trustee who is not a related or subordinate party who is subservient to the wishes of the grantor (i.e., an independent trustee) 672(c): Defines related or subordinate and presumes that a related or subordinate party is subservient

Veterans Asset Protection Trust (VAPT) Grantor Trust Rules 674; Power to control beneficial enjoyment 674(b)(5)(A): Exception for corpus distributions by anyone if limited by reasonably definite standard (HEMS) 674(d): Exception for income distributions by trustee other than grantor if limited by reasonably definite standard (HEMS)

Veterans Asset Protection Trust (VAPT) Grantor Trust Rules 675; Administrative powers 675(1): Power to deal for less than full consideration 675(2): Power to borrow without adequate security 675(3): Borrowing of trust funds 675(4): General powers of administration exercisable in a nonfiduciary capacity 675(4)(C): Power of substitution

Veterans Asset Protection Trust (VAPT) Grantor Trust Rules 676; Power to revoke 677; Income for benefit of grantor 677(a)(1): Power to distribute to grantor or spouse 677(a)(2): Power to hold or accumulate for future distribution to grantor or spouse 677(a)(3): Power to apply to payment of life insurance premiums on life of grantor or spouse

Veterans Asset Protection Trust (VAPT) Ensure grantor trust status over residence To preserve the 121 exclusion of gain for the sale of the veterans principal residence during lifetime Create VAPT with Residence Trust along with a Nongrantor Trust in a single trust document

Veterans Asset Protection Trust (VAPT) Ensure grantor trust status over residence Grantor trust status obtained by intentionally tripping over the grantor trust rules of 671679 Optional 674(a) power to add charitable beneficiaries Optional 675(4)(C) power of substitution

Veterans Asset Protection Trust (VAPT) Retain testamentary LPOA To get stepped-up basis 1014(b)(9); Property acquired from the decedent 2038(a)(1); Revocable Transfers Estate inclusion achieved How do we avoid grantor trust status under 674(a)? Exception to grantor trust status if LPOA only exercisable by will so long as only over principal and not over income or capital gains (674(b)(3)) Allocate capital gains to income Mandatory distribution of income to lifetime beneficiaries

Trust Protectors Began in the offshore planning area States have begun to enact statutes governing this area What is the trust protectors job? Depends on who you ask

How We Describe a Trust Protector

Trust Protectors We can allow the Trust Protector to serve several important functions - Removal and replacement of Trustee (may be limited) Appoint an independent special trustee Power to amend the trust Power to terminate the trust Power to examine trust records

Removal of Trustee In general, the trust protector can remove any trustee. Possible exceptions - A descendant of the grantor Is this a good idea?

Removal of Trustee With no exceptions

Removal of Trustee Except a descendant of the grantor:

Power to Amend the Trust Under what circumstances?

What About the Power to Terminate the Trust? Do you want the Trust Protector to terminate if no longer economical or otherwise advisable?

The Termination Language Should Never Allow Principal to Revert to Grantor It allows for undistributed income and principal to be distributed to the principal beneficiaries only. No way for the grantor to access principal, even if an income beneficiary.

Relate Back Provisions Generally a good idea

Fiduciary vs. Nonfiduciary Capacity Nonfiduciary capacity

Fiduciary vs. Nonfiduciary Capacity Fiduciary Capacity

No Duty to Monitor You may include a proactive statement regardless of fiduciary vs. nonfiduciary -

Trust Protector Held Not Liable for Failure to Monitor Actions of Trustee McLean v. Ponder (2013 WL 5761058) Even though trust value decreased by $1,000,000, no evidence of breach of any duty of TP resulting in decrease in trust assets Court stated TP only has authority stated in trust agreement Be careful and specific in drafting TP provisions Address whether fiduciary or non-fiduciary capacity and exact authority intended to be given

Trust Protector Action in Amending Trust Upheld Minassian v. Rachins (WL 6775269, 4 th DCA, No. 4D13-2241, December 3, 2014) Trust authorized trustee to appoint TP to clarify any ambiguities Ambiguity over whether children from first marriage were current beneficiaries entitled to accountings or only became beneficiaries upon death of 2 nd spouse TP was appointed and clarified that intent of grantor was his kids would only become beneficiaries upon death of 2 nd spouse, so not right to accountings while she was alive Ruling Florida Trust Code allows for appointment of TPs and authority given to the TP in this case not outside scope of law Court rejected childrens argument that UTC makes court modification only way to amend an irrevocable trust

Trust Protectors Many states do not have statutes re: trust protectors A few who do: Alaska Arizona Michigan Idaho Missouri

State Treatment of Trust Protectors Missouri A trust protector can direct the trustee with respect to specific matters. A trust protector is required to act in a fiduciary capacity, but is not a trustee and is exonerated from all liability unless it is established by a preponderance of evidence that the trust protector breached his duties in bad faith or with reckless indifference. If a trust protector is granted a power to direct, consent or disapprove a trustee's investment, distribution or other decisions, then, only with respect to such power does the trust protector have the same duties and liabilities as if serving as trustee. Except in cases of bad faith or reckless indifference, a trustee will not be liable for following the written direction of the protector. The trustee has no duty to monitor the conduct of the trust protector, provide advice or consult with the trust protector, or communicate with or warn any beneficiary that the trustee might have exercised its own discretion differently.

Who Can Serve As Trust Protector? Must be an independent individual

Should the Drafting Attorney Serve? Does your malpractice carrier insure your actions? Be prepared to serve in a fiduciary capacity Pros and Cons

Compensation of a Trust Protector Our documents allow for reasonable compensation

Do You Have to Name a Trust Protector Immediately? No You can name a Trust Protector Designator Eligible persons - A named person or entity The income beneficiaries (not recommended) A court

Language When Trust Protector is Not Appointed Right Away

A Word About Contingent SNT Provisions They are there to protect you and your clients Always include them!

Funding Do you offer a Peace of Mind Funding option? What happens when you dont?

3 rd -Party Supplemental Needs Trust When does a revocable SNT become irrevocable? When the creator dies When the trust becomes entitled to receive retirement account benefits When the trust receives an individual transfer over a specified amount by someone other than the creator

3 rd -Party Supplemental Needs Trust When does a revocable SNT become irrevocable? When the creator dies The creator is no longer able to revoke, so the trust becomes irrevocable

3 rd -Party Supplemental Needs Trust When does a revocable SNT become irrevocable? When the trust becomes entitled to receive retirement account benefits Treas. Reg. 1.401(a)(9)-4, A-5(b)(2) requires the trust to be irrevocable for RMD purposes and to avoid the 5-year payout rule of 401(a)(9)(B)(2)

3 rd -Party Supplemental Needs Trust When does a revocable SNT become irrevocable? When the trust receives an individual transfer over a specified amount by someone other than the creator Otherwise, potentially unintended gift to creator Asset protection from creators creditors Inclusion in creators estate

Financial Powers of Attorney Include provision nominating guardian Avoid guardianship, if possible Statement of intent to render guardianship unnecessary Provision requesting court to deny petition to appoint guardian if agent is acting under POA If all else fails, direct that the agent under the POA be appointed as guardian

Howard S. Krooks, Esq., CELA, CAP 7284 West Palmetto Park Road Suite 101 Boca Raton, FL 33433 1-800 ELDERLAW 561-750-3850 www.ElderLawAssociates.com Boca Raton Aventura Weston West Palm Beach Of Counsel, Amoruso & Amoruso LLP, Westchester, NY Thank You!

howard s. krooks, esq., cela, cap 7284 west palmetto park road suite 101 boca raton, fl 33433 1-800...

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